Joe Foster
The gold market is building strength and acting as a financial hedge against uncertain financial markets. The gold price traded above US$1,300 per ounce in May for the first time since January 2015 reflecting investors’ increasing unease towards a weakening financial system according to a leading US gold expert from VanEck.
Joe Foster, Portfolio Manager of VanEck’s Gold Strategies said, “Global conditions today aren’t that different than six months ago when gold struggled near its lows. In our view, the fundamental change is investors’ view of central banks. Investors are realising that central bank policies lack efficacy and have run their course without accomplishing their intended results.
“In general, central banks appear to be rapidly running out of options to help stimulate economies. In fact, rather than helping, quantitative easing, zero rates and negative rates have created distortions in capital allocation leading to the mispricing of assets and currencies, wealth inequality, and possibly other harmful, unintended consequences on the financial system. We think the solution of the world’s problems hinges on re-establishing robust economic growth,” Foster said.
“Another factor contributing to this year’s spectacular gold rally is the fact that gold mining businesses are in a much better position than they were a few years ago. They have successfully slashed costs, cut debt, gained efficiencies and generated cash. The elimination of short selling pressure has also supported the rise in gold stocks since they crashed in 2013,” he said.
“The gold price was much higher in 2011, topping US$1,921 per ounce, but we think the earnings power of the gold sector is greater now than back then. We estimate that a US$100 (roughly 8 per cent) move in the gold price from US$1,300 to US$1,400 per ounce would result in a 38 per cent increase in free cash flow for the majors in our research universe, while the mid-tier producers would see a 68 per cent increase in free cash,” Foster said.
The performance of gold stocks is another sign of strength of the current gold market. The NYSE Arca Gold Miners Index (GDMNTR)1 advanced 28.1 per cent in April. Many of the larger producers announced favourable first quarter results in April, which further boosted the performance of gold equities.
Russel Chesler, Director Investments & Portfolio Strategy, VanEck Australia said, “In early 2016, the gold market has “woken up” after a lengthy slumber and now, gold is “hitting the gym” and building strength. After a brief consolidation, the gold price reached its 2016 high in early May and ended the month of April up 5%. Meanwhile, gold equities look like they may be training for a “bodybuilding competition”, gaining nearly 30% in April.
“Gold has fallen off slightly this week as the US dollar hit a new three-week high following expectations the central bank could soon raise interest rates, however we still expect there to be opportunities for gold to rally as investors remain uncertain about financial risks.
“Gold is up 18 per cent YTD and gold equities are up 75 per cent. During the 5 year gold bear market, gold equities were down 80 per cent. Gold equities relative to the gold bullion price as measured by the Barrons Gold Miners Index2 is still below its 1942 lows and needs to increase at least another 25 per cent to get back to that previous historical low
“There is no doubt that gold has been front of mind for Australian investors. We are seeing strong inflows from Australian investors into the VanEck Vectors Gold Miners ETF (GDX) which was cross-listed on the ASX mid last year. GDX is one of the top 20 most traded ETFs on the NYSE, with an average daily trading volume in excess of US$1 billion,” Mr Chesler said.